Trust Cerberus

Nardelli is an unexpected choice to lead Chrysler -- but bucking conventional wisdom is how Cerberus succeeds, says Fortune's Katie Benner.

NEW YORK (Fortune) -- For a firm adamant about staying low-key, Cerberus has a knack for making attention-getting moves, most recently by maneuvering Bob Nardelli into the top spot at
Chrysler. But the much-criticized hire is consistent with the strategy that has made the relatively new Manhattan investment firm a serious rival to Wall Street's buyout kings.

Appointing Nardelli chairman and chief executive pushed Tom LaSorda from the CEO role (though he will remain president) and came as a surprise for those who had believed weeks of
rumors that Cerberus advisor and former Chrysler chief operating officer Wolfgang Bernhard would become the chairman of the board.

With the closing of the Chrysler deal, the (very) private equity shop is poised to succeed or fail very publicly, say Fortune's Katie Benner and Geoff Colvin.
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Moreover, the announcement that Nardelli will lead Chrysler pushes people's buttons. With all the great CEOs still roaming the earth, why choose the one whose management record has
been eclipsed by his incredibly high salary at Home Depot, his exorbitant golden parachute and his imperious manner as Home Depot (Charts, Fortune 500) stock floundered?

With this latest development in the Chrysler saga, it looks like the automaker isn't the only battered asset in the mix. Not only is the company in need of an overhaul, its newly
chosen leader is in need of a reputation makeover.

However, Cerberus is not your typical Wall Street firm, and it loves to flout conventional wisdom. (For more of this, look no further than the Cerberus feature in the latest issue of Fortune, which gives readers an
inside look at the firm.)

LaSorda and Bernhard seemed perfect to lead Chrysler. The unions seemed pleased to work with LaSorda and it could be argued that few know the company as well as Bernhard, who once
oversaw all of its operations. But the board, weighted with Cerberus employees, decided that the automaker needed new leadership that could prevent the company turnaround plan from
falling into the same old mire of labor negotiations, fights against fuel efficiency standards and making cars that are out of touch with what the public wants.

One must remember that before he was the poster boy for outrageous executive compensation, Nardelli was the face of efficiency and discipline at General Electric (Charts, Fortune 500). Sure he's not an autos guy, but he is a guy who makes tough
decisions and boosts a company's bottom line at any cost.

Even so, there are plenty of voices that want this turnaround led by an auto industry veteran. "The Detroit Three are not incompetent," says Peter Morici, a professor at the
University of Maryland's Robert H. Smith School of Business. "They lose money owing to burdensome legacy and everyday labor costs, and antiquated work rules. Right now either Ford (Charts, Fortune 500) or Chrysler is headed for Chapter 11. Nardelli's appointment makes
it more likely that Chrysler will be the company that fails."

This risky, counter-intuitive approach to people and investing is the one that has allowed Cerberus to balloon from $10,000 to $26 billion in assets under management in just 15 years,
along the way besting buyout kings like Henry Kravis and veteran dealmakers like Wilbur Ross.

In fact, the firm's specialty is to invest in the assets that no one else believes in. A quick Cerberus recap would read something like the little investment firm that could: unknown
hedge fund with a Howard Hughes-ian founder/leader and a disconcerting name quietly makes a killing in distressed bonds; eventually controls distressed companies that as one lawyer
charitably put it, "all look like total pieces of crap"; refuses to hobnob, do lunch, play golf, or "entertain" potential investors or managers; picks up dozens of former c-suite
executives to right its portfolio businesses; turns these companies around just before their sectors also recover; makes a lot of money.

Cerberus invested in Japanese banks when that industry was at its nadir. It swooped up subprime lending assets that had gone bankrupt in the late 1990s, folded them into its portfolio
company Aegis, and did very well for itself during this most recent real estate boom. Most recently, it has been placing huge bets in the U.S. manufacturing industry, the most
distressed of all distressed assets.

Not only has the timing of its acquisitions given people pause, Cerberus has often puzzled onlookers by putting faith in managers who have been dismissed by the general public. Its
global chairman is none other than Dan Quayle, the former vice president who couldn't spell potato. His connections have allowed Cerberus to buy controlling stakes in valuable real
estate and banking assets in Japan, where he is very well regarded, and introduced them to investing opportunities throughout Asia and Europe. He worked doggedly to help Cerberus win
Air Canada's parent company ACE Holdings, even after ACE chose to go with a Hong Kong investor. Even though it was originally passed over, Cerberus eventually won that deal.

While the rest of the world still tells jokes about the ex-VP, Cerberus is having the last laugh. Let's hope for Chrysler's sake that Nardelli will be as tough, results oriented, and
effective as... Dan Quayle.